Near-Field Dreams By Lauri Giesen

A new technology called near-field communication brings contactless payments to mobile phones, and has bankers, merchants, and wireless executives looking at a raft of electronic services that were never possible before. But some wonder whether NFC opens the door for wireless carriers to compete for transactions.

Already, the contactless card-based payment programs that have been deployed during the past several years have generated positive feedback from retailers and consumers alike. Because retailers liked the programs’ transaction speed and higher tickets while consumers appreciated their convenience, there were plans underway for steady increased rollouts of the technology by large card issuers, such as American Express Co. and JPMorgan Chase & Co., and major retail chains, including 7-Eleven, McDonald’s, and CVS pharmacies.

Then, late last year came news that could send the popularity of contactless payments soaring even higher. Payments companies announced they would combine contactless payments with NFC technology, making the ubiquitous cell phone a payment device and opening a wide range of electronic payment and merchandising possibilities for the first time. “There is a host of incremental things that you can do with a smart phone connected to a smart receiver that you can’t do with a plastic card,” explains Murdo Munro, MasterCard vice president of advanced payment solutions.

With contactless payment, plastic cards come equipped with inlays consisting of microprocessor chips and tiny antennae. When consumers wave or tap these cards near or on accepting terminals, payment data flow via the air waves between the card and the terminal, allowing the consumer to either charge a purchase to a credit card account or deduct the purchase from a bank debit or stored-value account. Unlike the case with conventional card swipes, the consumer never lets the card leave his or her possession.

Although acceptance costs to merchants are no different with contactless cards, retailers participating in these programs found the checkout times were faster than with cash and consumers typically bought more when they were not restrained by the amount of cash in their wallets. This makes the technology especially valuable to high-throughput merchants, such as grocers and fast-food chains, and has opened possibilities for Visa USA, MasterCard International, Discover Financial Services Inc., and AmEx to get their cards accepted for the first time at venues that have historically accepted only cash.

The Atlanta Pilot

NFC takes this concept a step farther by putting the payment information inside a cell phone. Like contactless cards, these phones can also be waved near point-of-sale readers to make purchases at physical stores. Unlike wireless technologies like Bluetooth, NFC range is extremely short--officially, four centimeters. But NFC chips can establish links to each other in the twinkle of an eye and send data to each other with little or no fiddling by the user of the phone.

So when you wave one of these phones near a so-called smart advertising poster, for example, a chip in the poster recognizes the chip in the phone and sends a radio message to the handset, downloading a Web-page URL to the phone’s browser. When this Web page pops up, customers can get information related to an existing purchase or generate an additional transaction.

This year is expected to be an important one for testing NFC as an advance on the idea of contactless payments. One pilot program everyone in the payment industry is watching began in January at Philips Arena, home of the Atlanta Hawks of the National Basketball Association and the National Hockey Association’s Atlanta Thrashers. It is sponsored by a group of heavyweights in the payments and communications industries including JPMorgan Chase & Co., Cingular Wireless, Nokia, Philips, Visa USA, and ViVOtech Inc.

That test involves 250 consumers, 150 point-of-sale contactless readers at concession stands, and about 60 smart posters scattered throughout the arena. Users, who are season ticket holders with Chase Visa and Cingular accounts, have been given Nokia 3220 handhelds with NFC chips embedded in the cover (future phones will incorporate the chips in the phones themselves).

The pilot, expected to run until June, will allow these select fans to use their phones as contactless credit cards to pay for their hot dogs and nachos during the games. But even more important is that a host of other applications, including the ability to download digital games and other content from the smart posters, is under way.

Other payments companies are also expected to tie NFC to contactless payment this year in similar pilots. MasterCard had previously tested the use of Nokia cell phones for purely payment applications in 2003 in Dallas. Then in late 2005, MasterCard announced it would launch pilots of its PayPass contactless payments on mobile phones from Motorola Inc. While MasterCard executives say more consumer tests of NFC and contactless payments will be announced yet this year, MasterCard and Motorola are already testing the use of the phones for advanced payment applications by employees in both of the two corporations’ headquarters.

Motorola also announced in February its M-Wallet handset software that will allow users to store credit and debit cards and access their bank accounts. M-Wallet will work with NFC-based contactless readers at merchant locations later in 2006, according to Motorola officials, who add they expect to have at least some of their phones equipped with NFC chips by the end of the year.

Included in the NFC tests is the use of smart posters for reloading value onto the phone chip, Munro says. When a user waves a phone near the poster, a Web site appears on the phone where the user can download value.

Loyalty Leads

American Express has also been very aggressive in contactless payments, with rollouts in several major cities, and it has contracts to launch the technology with a number of national retail chains. Because of its commitment to contactless payment, AmEx is expected to jump on the NFC bandwagon this year, according to industry sources. An AmEx spokesperson would only say that the payments company is “keeping a pulse” on the technology, but there were no announced plans to test NFC as of mid-January.

But industry experts question how AmEx and others can possibly stay out of the NFC fray. “Everyone will jump on this (NFC),” says Melanie Broad, research analyst for the emerging-technology group of Waltham, Mass.-based Mercator Advisory Group. “All the associations realize the value and they’re not going to let this opportunity go by.”

The Atlanta pilot, however, may be the first indication of whether consumers and retailers will actually realize the promised value of combining NFC with contactless payments. “The Atlanta pilot will give us an indication of whether consumers will be comfortable making payments with multiple contactless devices,” says Tom O’Donnell, senior vice president of Chase Card Services. “When we rolled out Blink (Chase’s contactless payment card), we built the chip into a device that consumers were already used to using to make payments—the credit card. Now we have the opportunity to see if consumers will use another device--the cell phone—[with] which they are not used to using to make payments.”

Additionally, O’Donnell says Chase is interested in finding out whether consumers will be attracted to the additional services that NFC allows and, if so, which services have the greatest potential. “Will consumers use these programs and do they see value in them are among the fundamental questions we’re trying to get answers to,” he says.

Among some of the features of the Atlanta pilot is the ability for consumers to download information about their favorite teams and players onto the screen of their cell phone, check the teams’ upcoming game schedules, purchase tickets for future events, and set the phone’s ring tone to play the fight song of the sports team.

But while some of these advanced applications may seem more gee-whiz than practical, supporters of NFC say there are a number of applications in which the technology can give customers real value when they use cell phones to make payments. Indeed, what excites NFC backers is the ability to do what cell-phone makers call wireless provisioning—the automatic download into phones of a dizzying variety of digital media, including games, songs, animations, receipts, coupons, even new credit cards.

“We’re focused on the core payment functions,” says Scott Rau, senior vice president of Chase Card Services. “Other participants in the program are interested in the value of added media content. But even within the payment area, there are a number of services and applications where we’re interested in seeing what the customer reaction is.”

Right now, loyalty programs and electronic couponing top the list of NFC benefits for most payments experts. Mohammed Khan, president and founder of ViVOtech, which makes the readers and software for many of the contactless programs including the Atlanta pilot, explains that most of the current card-based retailer loyalty programs require that consumers either go to a Web site or swipe their cards in special devices to find out how many points they have accumulated. NFC-enabled phones, though, come with an electronic wallet that stores card accounts but can store a lot more. “With NFC, I can store my rewards points on my phone and check the balance at any time and then redeem those points when I am ready,” Khan says.

Likewise, electronic couponing programs would allow users to download discount coupons from a smart poster in a store, a subway station, or anywhere consumers congregate. Coupons could then be redeemed immediately or at a later date by waving the phone near the contactless POS receiver. “With smart phones, a lot more details about the purchase can be stored on the phone than you can handle with cards,” says Niki Manby, Visa vice president of market technology and innovation.

Behind loyalty and couponing, an application for contactless payment and NFC that holds a lot of potential lies in vending machines. Malvern, Pa.-based USA Technologies Inc., which has been aggressively working to get both traditional card acceptance and contactless payments deployed in vending machines throughout the U.S., has worked with ViVOtech to develop NFC readers. NFC-equipped machines could accept payments from traditional cards, contactless cards, or other devices, such as cell phones.

Jim Turner, vice president of intelligent vending for USA Technologies, says there is much interest among the major soft-drink and snack companies that own many of the vending machines in allowing consumers to buy with their phones. And he notes that combining the couponing function with contactless vending purchases has particularly strong potential.

“Coke and Pepsi are very interested in doing special promotions in which consumers could download a coupon for their products and then use their phones to redeem those coupons when they purchase the product at a vending machine,” Turner says.

Another application many argue would appeal to consumers is ticketing. Attendees at a concert or sporting event could buy tickets for future events by waving their phones near a smart poster promoting the event. By doing this, they would be taken to a Web site where they could order the tickets. They would not need to enter a credit card number since that information was already stored in the phone.

Another example ViVOtech’s Khan points to is the situation in which someone goes to a movie multiplex to see a movie, but hasn’t decided which one. Such individuals could wave their phones near the publicity posters for each film that’s showing and receive a short description of the film with its ratings and possibly even see how the film was reviewed by the major critics.

Similarly, MasterCard’s Munro describes a scenario where someone at a railway station waves a phone near a designated sign. Instantly, a train schedule for routes passing through that station appears on the phone’s screen. The rider might even be able to purchase a ticket with the phone and then wave the phone again to redeem the ticket as he boarded.

In short, what NFC does is provide a seamless, nearly instantaneous link between the physical and virtual worlds. Some NFC supporters even propose allowing consumers shopping in a store to be directed from smart posters to Web sites where they could buy items beyond what was offered on the merchant’s shelves.

However, Visa’s Manby believes while some consumers will use this last application, its appeal may be more limited. “In the U.S., consumers have such easy access to PCs to make purchases over the Internet that I don’t think a lot of consumers will make Internet purchases from their phones. Most of the purchasing in the U.S. will be at stores. It is different in Asia where a large number of consumers’ only interaction with the Internet comes through their phones,” she says.

Yet some NFC skeptics question how many American consumers will want to use their phones to make purchases at all. “Cell phones present a lot of problems for purchasing,” says Steve Campisi, president of Digital Defense Group, an Omaha, Neb.-based company that manufactures a biometric-based smart card for payments. “You don’t always have them handy when you need them and the battery is often running low. I don’t think they are a good reliable vehicle for payment. We’re committed to the card.”

Companies making investments in contactless and NFC payment functions have a lot riding on the idea that Campisi is wrong. U.S. Technologies’ Turner, for example, argues it’s gotten to the point that nearly everyone carries a cell phone, making the device too handy not to make payments with it. “Nearly everyone has a cell phone these days and they take them anywhere. And when consumers are surveyed about what devices they carry around of value, the majority of them cite their cell phones,” Turner says.

Campisi also questions whether any of the sophisticated applications will have enough appeal to get consumers excited.

“A lot of the couponing applications are overrated and early tests of electronic couponing haven’t been all that successful. Most of the rewards programs can be offered through cards. If you ask consumers want they want in payments, most of them will tell you that they are more interested in enhanced security than in couponing or rewards programs,” he says.

But even the strongest supporters of NFC concede that to make it work, there needs to be a combined effort by payments companies and card issuers, retailers, handset makers, and wireless service providers. “This will require a lot of cooperation. It is no longer just a Chase Bank issue, but one that requires that all the parties work together,” notes Bruce Cundiff, research analyst for Pleasanton, Calif.-based Javelin Strategy & Research.

The role of the wireless carriers, however, may require some more definition. They may view NFC-enabled contactless payment as another benefit that makes their basic phone service stand out in a competitive field. But some observers wonder if the carriers will want to do more than just provide phone-related products and services.

While for years banks and payment companies have suspiciously eyed the carriers as future competitors, most efforts thus far by phone companies to get into the payments business have had limited, if any, success. But NFC may be the entry point. “There is the potential for a real battlefield for controlling the payments,” says Michael Friedman, director of the merchant technology practice for Mercator Research. “It has not been resolved yet what role everyone will play.”

Friedman notes that, in Japan, the telephone carriers process payments, and he believes there is “room for the carriers to move into payments processing” in the U.S. as well.

Also, Javelin’s Cundiff predicts that some carriers may offer consumers the ability to put purchases made from the phone on their phone bills, cutting debit and credit card issuers out of the picture altogether. At the same time, though, this function might boomerang badly on the carriers if monthly wireless tabs get too high. “The telcos have the ability to use their billing relationships to add on purchases, but the question remains as to whether consumers will want to have all their purchases show up on their phone bills,” Cundiff says. “There is the potential for sticker shock when customers used to paying $100 a month suddenly start getting phones bills of $500 or more.”

A spokesperson for Cingular Wireless, a participant in the Atlanta pilot, notes that laws in some states, including California, prohibit phone carriers from charging consumers for non-phone-related services. While not ruling out the possibility of wireless companies becoming more involved in the payment side of NFC, the Cingular spokesperson says the wireless companies for now are more interested in bolstering average revenue per user by charging for the content that can delivered over the phone—such as special graphics or ring tones. Already, Cingular is handling payments of $2 to $3 each for ring tones and other premium content downloaded from the smart posters in Atlanta.

Meanwhile, both Friedman and Cundiff predict that NFC could get some card issuers the phone business. “The card issuers could move into mobile-phone service by buying and reselling carrier service that has been combined with their payments programs,” Friedman says.

While banks have not had a strong track record in selling hardware to promote bank services in the past, as evidenced by the 1990s screen-phone efforts, NFC could make phones tempting to banks again. “I’ve heard that some issuers are toying with the idea of distributing phones to their customers to get the programs off the ground,” Cundiff says.

Many in the payments industry predict that in the end, the card issuers, phone manufacturers, and cell-phone operators will cooperate.

“The payments will travel down the normal railroad, meaning that there will be the same payments processors and card issuers involved in the payment as before. The carriers are more interested in using payment as an added value on which to sell their phone services without getting involved in the actual payment side of the transactions,” says MasterCard’s Munro.

One possible new business for the carriers, Munro adds, stems from the idea that some financial-services companies may pay the wireless carriers to encode the phones with the necessary card- account information while other card issuers perform that function themselves. But Munro says that is not all that different from the current plastic card world, where some card issuers hire a third party to encode their cards while others perform the task internally.

ViVOtech’s Khan agrees. “The only difference is that in some cases, the retailer may pay a few cents to the wireless service for bringing them the sale—a sales commission,” he says.